Pakistan-US economic ties
By Ishrat Husain
Wednesday, 08 Apr, 2009 | 07:37 AM PST
THE Obama administration has recently completed a review of Washington’s Pakistan
strategy. The US Congress is considering a bill that will triple aid appropriations to Pakistan for non-military economic development and another bill to set up
Reconstruction Opportunity Zones in Fata.
Is US aid as envisaged in the Kerry-Lugar bill an appropriate tool for Pakistan’s longterm
economic development? Is its disbursement through the existing channels the most
preferred mode of assisting Pakistan in its endeavour to resume its journey to sustainable
and equitable growth? Before we get overwhelmed by this act of generosity the issue
needs to be explored.
In my view, the proposed appropriation and mode of delivery with inherent political
conditions built into the bill is the least desirable of all options to help Pakistan and
improve the US image. Literature on the effectiveness of aid gives evidence that very few
developing countries have made good use of this resource for the larger benefit of their
populations. Government-to-government assistance results in the relaxation of domestic
efforts to mobilise revenues through taxation, non-tax receipts, user charges, and induces
wasteful and unproductive expenditures.
Tied aid, in the form of procurement of goods and services sourced from the donor
country, reduces the net benefits to the recipient country. USAID is particularly notorious
in this respect as it is popularly believed that as many as 70 cents per aid dollar ends up in
the hands of US-based private contractors, consultants, administrators and suppliers. This
form of assistance hardly creates a significant number of jobs in the economy.
There is a mistrust of government agencies in developing countries and these are often
bypassed. This has created more distortions in the economy. Instead of strengthening the
capacity of institutions responsible for delivering basic services to the people, NGOs are
permitted to act as intermediaries in the execution of projects. They hire government
officials or professionals at very high compensation packages. This tends to deplete the
human resource reservoir available to the government and impairs its capacity. Aid flows
also lead to ‘Dutch disease’ where the appreciation of domestic currency discourages
exports and exportable goods and makes non-tradable goods more attractive.
The political dependence and loss of control over these aid resources are the most
persuasive argument as far as public opinion is concerned. Pakistanis are convinced that
their economy waxes and wanes with the rise and ebb of US assistance. As
democratically elected governments, in contrast to military dispensations, may not always
toe the US line they are more vulnerable to the abrupt suspension of aid and the
consequent economic dislocation. The goal of building a stable civilian government thus
remains at risk.
Although there is no empirical evidence to substantiate it, there is a widespread feeling
that exceptional US aid has been instrumental in boosting economic growth recorded
under military governments. Despite huge losses suffered by the economy (an estimated
Rs37bn) as a result of 9/11, most outsiders attribute Pakistan’s economic turnaround to
the inflow of $10bn from the US.
Although the proposed US aid of $1.5bn in the Kerry-Lugar bill would contribute only
three to four per cent of Pakistan’s total foreign exchange earnings the psychological
damage it will cause to Pakistanis and Americans far exceeds the benefits derived from
this paltry sum. Pakistanis will resent their economic fortune being controlled by the US
and strong anti-American sentiments would be reinforced as a result.
There is no doubt that the Obama administration wishes to demonstrate through this aid
bill that the US is a long-term friend of Pakistan. But there is the risk that Congress, think
tanks, and the media will use this as a stick against Pakistan every time they perceive that
it is not doing enough. Hundreds of Pakistani soldiers have been killed in the war on
terror, many more have suffered crippling injuries. The country, which has captured
hundreds of Al Qaeda and Taliban operatives, has seen infrastructure destroyed, hundreds
of thousands of people internally displaced, its political leaders exposed to terrorist
threats, millions among its population antagonised, and has spent large amounts from its
resources on beefing up internal security.Yet the consistent theme from the other side is
that Pakistan is providing sanctuary to the Al Qaeda leadership, nurturing the militants
and that its intelligence agencies leak sensitive information to the other side. The
possibility of the suspension of US aid, under pressure from American public opinion,
will, therefore, always loom large, cause economic disruptions and sour relations between
the two countries. The best way forward to strengthen US-Pakistan economic relations
and create a vibrant economy is through the following measures.
First, the US should finance only such infrastructure, education and health projects that
are included in the government’s development programme. It should commit the money
by co-financing these projects with the World Bank and Asian Development Bank that
have the required expertise and the experience of working with and strengthening the
institutions responsible for project planning and execution. This would be the most
effective use of the US taxpayers’ money.
Second, the US Chamber of Commerce has rightly called for easing access for the
country’s textiles to American markets. American tariffs on Pakistan’s leading exports
average approximately 10 per cent, about four times the average US tariff rates on
imports from other countries. A reduction in tariff rates would not confer any favour on
Pakistani exporters but provide them with a level playing field. For a country that so
strongly believes in marketplace competition this is a correction not a concession.
Third, Pakistan needs foreign direct investment in power-generation, transmission and
distribution, gas pipelines, oil and LNG terminals, refining capacity, petrochemical
complex, etc. US investors should be encouraged through Export-Import Bank loans and
Overseas Private Investment Corporation guarantees to participate in Pakistan’s energy
development plans.
Fourth, the US leads the world in higher education and scientific and technological
research. They should resume their assistance in training our teachers and scientists in
leading US institutions, forging links between Pakistani and American universities and
strengthening the capacity of our research organisations in agriculture, water resources,
renewable energy and low-cost building materials.
These four channels of US assistance have a much better chance of achieving the goals
shared by the US and Pakistan — a strong and prosperous Pakistan capable of
safeguarding its territorial integrity — than direct US assistance administered through the
existing traditional channels.
The writer is a former governor of the State Bank of Pakistan and Dean and Director IBA Karachi
Obama is very realistic and practical man.
He is trying his level best to weed out Islamism of Taliban and provide an opportunity for economic progress in those areas where radical Islam has replaced everything else which stands for civilization.
This cacrrot and stick policy of United States should be taken in right spirit by Pakistanis.
Firstly, Obama has tripled the aid for Pakistan thru Lugar Bill. This aid if invested properly will be beneficial for long term development.
Secondly, he has made clear that he will go after Talibanis inside Pakistan and if need be he will hold those elements in ISI responsible if they sympathise or assist Talibanis for some vague "strategic" gain-- hegemonic interest in Afghanistan.
Obama's honest efforst must be supported.
firstly ... study developmental economics and you will learn that aid is always imperialistic in nature and ends up in the hands of the corrupt ... that is why America supports governments to put money in their hand and work on its agenda that is not usually beneficial for the country .....
secondly ISI is our saviour or a country like india with its gargantuan and corrupt hand already red with the blood of many wont leave a moment to consume us ... the fact is that we and our combative readiness and tit for tat reply is the only way to survive .... if we werent so America wont leave a moment and attack us like it did on iraq
Long live pakistan and ISI
.... America wont leave a moment and attack us like it did on iraq
Iraq is an Arab country and like any other Arab country it is destined to live a life of subjugation.
Pakistan will not be attacked as long as we do not behave like Arabs.